Forex Market: GBP/USD edges lower on Omicron fears, FOMC and BoE policy meetings now in focus

GBP/USD weakened at the start of the new trading week, after British Prime Minister Boris Johnson said over the weekend the country encountered a “tidal wave” of the Omicron strain of the coronavirus, whereas two vaccine doses might not be sufficient to contain it.

The emergence of this new COVID-19 variant initially raised concerns it could have a significant impact on economic recovery, while mounting pressure on risk-sensitive currencies, including the Sterling. Last week, however, safe haven flows reversed following reports in the media that Omicron may not be as severe as feared.

Apart from Omicron headlines, market focus now sets on an array of central bank policy meetings scheduled this week, including the Federal Reserve on Wednesday and Bank of England on Thursday.

“Central banks will need to strike a difficult balance between Omicron-induced uncertainty and elevated inflation levels,” analysts at Barclays wrote in a research note.

Market participants expect the Federal Reserve to announce asset-purchasing program tapering acceleration, while opening the door to at least one rate hike in 2022.

According to CME Group’s FedWatch tool, market players now see an over 50% chance of a rate hike by May next year.

Meanwhile, CME’s BoEWatch Tool suggests a 17.5% chance of a 0.10% rate hike by February next year and an 82.5% chance of a 0.20% rate hike.

As of 11:07 GMT on Monday GBP/USD was edging down 0.16% to trade at 1.3246, while moving within a daily range of 1.3220-1.3261. Last week the major Forex pair slipped as low as 1.3160, which has been its weakest level since December 11th 2020 (1.3134). The currency pair has retreated 0.31% so far in December, following another 2.82% loss in November.

Bond Yield Spread

The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, equaled 27.71 basis points (0.2771%) as of 9:15 GMT on Monday, up from 24.8 basis points on December 10th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 1.3243
R1 – 1.3300
R2 – 1.3332
R3 – 1.3389
R4 – 1.3445

S1 – 1.3211
S2 – 1.3155
S3 – 1.3122
S4 – 1.3090